How Sub-Prime Lending Markets Will Affect You |
|
There is more to the picture of sub-prime
lenders, who of late, have gotten bad press for indulging in predatory practices, as a result of which they have suffered heavy losses in business. Many have been forced to quit. To start with, a sub-prime lender is one who lends money to high-risk individuals. But today, the biggest players, including large banks and insurance companies, are at a risk as they are losing a lot of money at the sub-prime game. Over the past several months, most major sub-prime lending companies have hit a rough patch. While some struggle to keep going, others simply have closed their doors or announced their bankruptcy. Their investment ratings have been downgraded due to the industry's legal and political risks, not to mention the financial realities of doling out money to high risk borrowers, secured only by high risk, high loan-to-value properties. But all is not lost yet. There is a strategy to aggressively create loans and then later sell them off in pools of securities, known as "securitization". This has given life to this multi-billion dollar industry, at the expense of profits. Equity is still king. Spending money to make money might make sense in business investments, but it is not always taken rightly. Financial analysts feel that consolidation in sub-prime lending markets will again make equity the king of business transactions. It will create a situation where the deal makers will be forced to revert to "practical solutions" for real estate financing options and not always opt for sub-prime borrowers. How This Affects You? One should always remember the cardinal rule that every deal is different and some basics are prerequisite for counseling your clients on closing deals in a less fluid environment. To cite an example, did you know that table funding (otherwise known as simultaneous closings) has become one of the hottest techniques in real estate transactions over the past eight years? This technique has been key in making up an estimated 20% of all private note sales. It is necessary to know how sellers needing cash could sell a newly created note simultaneously with the sale of their property. Most sellers assume that they need all the cash at closing. However, an installment sale can often be a better alternative, both from the point of tax benefits and reinvestment angle. A client holding existing paper could use that paper as collateral to secure more assets, while continuing to enjoy higher returns and more tax benefits. The Best Strategy And Other Options In case you come across reports of your clients disposing of real estate assets or liquidating existing notes, feel free to give me a call ahead of time. I will be happy to help you determine which strategy might work best. What I want to say that with the knowledge of alternative-financing techniques, you could give your client an option so that the latter could complete his/her transaction which is most suited to them. There are many options available, some from the old school; others new devised methods. But all these options come handy. Some worth mentioning: private seller carry back purchase mortgages, table funding, trading equities, exchanging, substituting collateral, bartering, using land contracts, converting existing notes to cash, and structuring lease options. Pros And Cons Of Sub Prime Lending? The numbers of both super-prime and sub prime borrowers have increased. But there is a different reason for the additional increase in the number of sub prime borrowers has increased as more companies have issued credit cards to them. While such a step has put extra strain on consumers" credit scores, it has also put them in the sub-prime category. It has been noticed that many take up to sub prime lending as it is only means to work toward reentering the financial mainstream. However, some borrowers who turn to the sub prime lending markets are financially unsophisticated, or even desperate. |
